Auto sales, Fed minutes — What you need to know for Wednesday

The first week of 2018 will have markets taking a good look back at 2017.

After a strong first day of the trading year, investors will on Wednesday digest economic data on auto sales and manufacturing activity for December, while the minutes from the latest Federal Reserve meeting will also feature on the schedule.

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The minutes should give markets an idea of what Fed officials were thinking when they voted to raise interest rates by 0.25% at their December 13-14 meeting.

Outgoing Federal Reserve Chair Janet Yellen.

The earnings calendar on Wednesday will feature no major announcements.

Tuesday’s rally to kick off the trading year should also signal good things to come for markets, according to LPL Financial’s Ryan Detrick. Detrick notes that in the last 20 years, markets have gained an average of 14% when the first day of the year is in the green, with down days to kick off the year leading to down markets for the year.

Good years follow good years

Which is true — on average, the S&P 500 has gained about 7% per year (excluding dividends) throughout history. But when stocks go up a lot, the market, on average, goes up the following year, too.

According to Bespoke Investment Group, in years the benchmark index gains more than 20%, the average return for the S&P 500 has been 10.5% the following year with the median gain clocking in at 12.8%. And in 68% of years that followed a 20% rally on the S&P 500, the market finished higher.

After strong years for the market, stocks have often followed-up with another stellar year. (Source: Bespoke Investment Group)

The clear contrarian view on this type of consensus optimism, of course, is to see the stock market’s record highs as setting investors up for a clear disappointment in the new year.

And while Bank of America Merrill Lynch strategists noted Tuesday that Wall Street’s bullishness is at its highest level in six years, their works shows investors are not yet euphoric. Additionally, the still-subdued level of investor enthusiasm the firm finds points to a 12% total return for the S&P 500 — 10% on price and a 2% dividend yield — over the next 12 months. This would push the index to a record high of 2,935.

A lack of volatility, however, need not be a precondition for strong returns in the market. And with 2017 having been one of the market’s calmest years since Lyndon Johnson was president, choppiness returning to markets wouldn’t be unexpected. After all, most years feature a market decline of about 10% from peak-to-trough during the year.

Market history, of course, doesn’t tell us what will happen but simply what has. And on that basis, 2018 gives investors plenty of reasons for optimism.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland